By Susan Kelly February 4, 2004 -- Cadmus Communications Corporation (NASDAQ/NM: CDMS) today announced net sales of $115.3 million for the second quarter of its fiscal year 2004, an increase of 1% from last year's second quarter. Operating income was $8.8 million and net income was $3.1 million, or $0.33 per share. This compared to an operating loss of $0.6 million and a net loss of $3.2 million, or a loss of $0.35 per share in the second quarter of 2003. Call Topics: Chairman Comments Financial Summary Q&A Chairman Comments - Review of Q2 Fiscal Performance Bruce Thomas, President and Chief Executive Officer, began the call by noting the summary financials as outlined in the news press release. (Editor's Note: When reviewing the comments made in last quarter's earnings call, segment by segment, the financial commentary was almost identical.) Specific operational highlights for the Publisher Services Group included: Professional Communications key initiatives: strong Content services performance, Cadmus ArticleWorks launched, ramp-up of India-based KnowledgeWorks Global Limited content services joint venture, and addition of press capacity and equipment to print journal operations. Specialty Publications: Volume and pricing levels under pressure, some page increases and additional supplements. Made additional cost reductions and have rationalized volume between plants. Specific operational highlights for the Specialty Packaging Group included: Sales remain strong with momentum to continue through 2003 into 2004. Continued top line growth for the 4 th consecutive quarter. New account generation (Health care and Nutrition sectors). Global Packaging Solutions initiative continues to drive “distribute and print” using offshore network. Short-run packaging will be adding NA's first in-line, roll-fed, packaging production system in late Spring to reduce make-readies and waste for customers in healthcare, apparel, and consumer good markets. The CEO summarized his presentation to emphasize Cadmus' Differentiation Strategy that includes: Invest in content-related technology; Develop global capabilities; and Add additional, highly-differentiated products and services from print. Cadmus was forthright in diagramming their strategic focus. For example, Cadmus' Publisher Value Proposition is as follows: Financial Performance Operating income rose 6% to $8.8 million and operating profit margins increased to 7.6%. EBITDA rose 5% to $13.7 million and EBITDA margins rose to 11.8%. Total debt decreased by $2.1 million during the quarter and currently stands at $172.1 million. Major outlays for the quarter included capital spending of $2.6 million and $6.1 million in semi-annual bond interest payment. 2004 Outlook – no specific numbers were discussed only that Cadmus is on the right track investing in initiatives to drive growth and expand margins. The initiatives will have a positive impact in FY 2004. Assuming no further industry deterioration and continued progress on key initiatives, fiscal targets for 2004 remain achievable. Cadmus expects to reduce total debt by $4-$8 million in 2004. Q & A: Cadmus' Specialty interest magazines have experienced the softness of business magazines with page count declines but now see this market stabilizing. The supplement market is recovering which is encouraging. However Cadmus continues to see price pressure and therefore they will focus on cost improvements. On average, Cadmus sees the magazine business stabilizing for them in 2004. The new bank facility can draw up to $60 million notwithstanding covenants. Higher education institutions and Libraries have publicly stated their recent sensitivity of cost increases to their institutions. Cadmus has focused on the quality of customers and content in these markets. The ISI Rankings gives the industry standard for quality of content in Education and Cadmus works for 70 of the top 100 rated journals. Therefore Cadmus is seeing a significant increase in page counts and a continued high acceptance by institutions to buy this content. The Cadmus team has been “passionate” about paying down their debt. The strength of their automating systems has created opportunities that they will selectively take advantage of to continue their growth in the future. Their mission has been to build industry leadership in the STM markets. The key issue for them going forward is to determine if their capabilities are transferable to other content rich businesses. Education was the first one they targeted and they are very satisfied with the results. Cadmus believes their technology is directly applicable to Education content to create a new standard. Education markets are huge and their one customer is a multi-billion dollar customer so it represents as very interesting opportunity. However they are proceeding with caution. Cadmus believes they have a “better mouse trap” for Education customers by using price-competitive offshore locations, global efficiencies, and publishing workflow expertise. Publisher Services revenues were flat again this quarter. The Magazine business was close to a double digit decline. However, this was offset by double digit growth in content. Cadmus believes they have a solid momentum in the journal business and that magazines are stabilizing. Specialty magazines are now less than 30% of their business which is “down dramatically from years ago”. “Pricing may not have gotten worse but it hasn't gotten any better” stated the CEO, Mr. Bruce Thomas. “Our approach to the market has allowed us to do better than our competitors.” Cadmus has a long list of traditional acquisition opportunities and they expect to see the same in the Education markets. Last year, they spent $500K to buy ArticleWorks however there are much larger opportunities for them in the content area, in healthcare markets, and offshore. Even though analysts pressed several times to get more information about upcoming acquisitions, Cadmus would not disclose any specifics about targets and timing. One customer story was cited but the CEO. Their largest Education customer started with Cadmus with outsourcing $3 million of print work which was enough to get Cadmus invited to a vendor meeting. At that vendor meeting, Cadmus presented their full capabilities as it relates to content preparation and distribution. This allowed Cadmus to work with their prepress suppliers which got them on the agenda for an India visit. Cadmus demonstrated how dynamic pages could be created using their technology platform. This level of automation helped win the business and grow the relationship. Cadmus realizes that they will have to add project management capabilities and that this will be essential to grow this business going forward.